It’s been a rough year for cryptocurrency.

Bitcoin is down nearly 65% from its 2022 peak in early January. Major exchanges are filing for bankruptcy. Calls for regulation are mounting.

The so-called “crypto winter” is starting to feel more like a crypto apocalypse.

Millions of everyday investors who sank money into cryptocurrency are facing a painful dilemma: Is it time to cash out of crypto?

It can be difficult to know when to cut your losses as an investor. But an investment objective can make that decision easier.

People usually create an investment objective before they purchase an asset. If you don’t already have one, now is a good time to create it.

What Is an Investment Objective?

An investment objective outlines why you think a particular asset is worth buying — and at what point you should sell.

Experienced investors may draft an investment thesis that’s several pages long. But you can keep yours simple.

Consider these questions:

  • What cryptocurrency do you own and why do you own it?
  • What is your risk tolerance (conservative, moderate or aggressive)?
  • What’s your time horizon? That is, when do you need to access the money?
  • Does the asset meet your investment goals? Why is this investment suitable for you?
  • Is the return on your investment meeting your expectations?
  • Are you trying to make quick gains, or do you believe in buying and holding for the long term?
  • What criteria will you use to decide when to sell?

How Do You Know When to Sell Crypto?

Some investors create a hard stop-loss as part of their investment objective. Once a stock or cryptocurrency loses 30% of its value, for example, they sell, no matter what.

Similarly, investors looking to make quick crypto profits may decide to sell once the asset gains 10% or 20% in value. Taking at least some profit can act as a hedge against potential losses in the future.

No matter how you define your investment objective, you should never invest more than you’re willing to lose.

“You also shouldn’t invest in anything you don’t understand,” said Jamie Lima, a certified financial planner and president of Woodson Wealth Management in San Diego.

Most experts recommend allocating no more than 5% of your overall portfolio to speculative assets like cryptocurrency.

Once you have a clear understanding of why you’re invested, the decision of when to sell crypto becomes easier.

What to Do If Your Crypto Investment Objective Says Sell

If you’re losing sleep at night over your cryptocurrency losses, it’s probably time to sell.

Other times when it makes sense to sell crypto include:

  • You no longer believe in its long-term success.
  • You’ve found better investment opportunities elsewhere.

You shouldn’t sell crypto simply because the price drops. If you still believe in its long-term value, stick to your investment strategy and hold.

But if holding crypto no longer meets your investing goals, here’s what comes next.

How to Cash Out From Cryptocurrency Exchanges and Payment Apps

Each cryptocurrency exchange has its own exit path, or process for cashing out your digital assets.

You’ll follow these basic steps to cash out your cryptocurrency from an exchange, trading platform or payment app:

  1. Exchange your cryptocurrency for U.S. dollars.
  2. Transfer money from your cryptocurrency account to your bank account.

Most major exchanges, such as Coinbase, let you sell your crypto for cash. Then you can transfer funds to your linked bank account.

Unlike many online stock trading platforms, which now offer $0 trades and no withdrawal fees, crypto exchanges often charge a combination of variable fees that can tack on an additional 0.1% to 2.5%.

Fees may be staggered in tiers. PayPal, for instance, charges a $1 fee if you sell $5 to $25 of cryptocurrency but a $2.50 fee if you sell $75 to $200 of cryptocurrency. You’ll pay a percentage fee after $200.

Some trading platforms — like Robinhood, eToro and Webull — don’t charge any fees to cash out your crypto.

Keep in mind that there will probably be a short holding period before you can transfer cash from a crypto exchange to your bank account.

Could Selling Crypto at a Loss Now Help You at Tax Time?

Selling at a loss isn’t always a terrible idea. Doing so can actually have positive tax implications if you took crypto profits earlier in the year.

When you sell an investment for more than you paid for it, the profit is subject to capital gains tax.

When you sell an investment at a loss, you don’t need to pay taxes on it. And a capital loss can actually cancel out taxes on your crypto gains.

“Few people think to do this, even though it can be very beneficial at tax time,” Lima said.

Let’s say you sold $500 of bitcoin in March and made a $100 profit on your original investment. You’d owe capital gains tax on $100 when you file your tax return.

But if you sold $200 of bitcoin for $100 less than what you originally paid for it, that $100 capital loss would offset your capital gain, essentially eliminating your tax liability.

What to Do If Your Crypto Investment Objective Says Hold

Are you a die-hard believer in bitcoin? If so, you’ll see the current market unrest as a temporary — if not extreme — fluctuation in price.

Bitcoin’s 2022 drop is nearly 65% — marking the fifth time in its 14-year history that it’s fallen more than 70% from an all-time high.

If your investment objective tells you to hold, it’s still important to understand the risks.

The Risks of Staying Invested in Cryptocurrency

High volatility is the most obvious risk with cryptocurrency. Price fluctuations are common in the stock market. But the massive highs and lows of the crypto market are unlike other assets.

“Ignore the hype that says investment value always goes up,” said Robert Persichitte, a certified financial planner at Delagify Financial in Arvada, Colorado. “Think critically about how you will get paid back and when.”

Because cryptocurrency is regulated by a patchwork of agencies in the U.S., investors don’t have the same protections offered by traditional financial institutions.

The future of cryptocurrency regulation is also in flux, though the U.S. Securities and Exchange Commission is cracking down on cases of fraud and market manipulation.

“People need to be protected from themselves sometimes,” Lima told The Penny Hoarder. “Having a more centralized organization overseeing cryptocurrency is likely where the industry is going.”

Following the terra/luna stable coin collapse in May, the SEC announced that it was nearly doubling its Crypto Assets and Cyber Unit.

Since then, the federal agency has made a series of high-profile moves, including fining reality TV star Kim Kardashian $1.2 million in October for allegedly failing to disclose compensation she received for promoting a cryptocurrency called EthereumMax on Instagram.

Smaller digital coins and exchanges with questionable financials may cease to exist as regulation ramps up.

Ryan Cole, a certified financial planner and managing director at Citrine Capital in San Francisco, said he believes in the future of bitcoin, but not other digital assets.

“Most of the crypto space is outright scams,” Cole told The Penny Hoarder. “There’s a very high likelihood that most non-bitcoin crypto gets completely wiped out.”

The truth is there’s no way to know if bitcoin and other cryptocurrencies have hit bottom. Prices could keep declining as the financials of digital coins and businesses in the industry face scrutiny.

The Risk of Keeping Money on a Cryptocurrency Exchange

Even if you’re fully committed to crypto and have conducted your own research, keeping your coins on an exchange long-term puts your cryptocurrency investment at risk.

The risk of keeping your digital assets with a third-party company came into sharp focus with the collapse of FTX in November.

FTX went from a company valued at $32 billion to filing for bankruptcy in a matter of days. Its dramatic demise shook the cryptocurrency industry to its core.

The millions of crypto investors with holdings on the exchange must now wait months or years before they recover their funds — if they recover them at all.

“The pure scale of it has been insane,” Cole said.

So what’s the alternative?

For cryptocurrency purists there’s only one way to go: Offload your current crypto holdings to a hardware wallet, also known as cold storage.

What Is a Hardware Wallet?

When you purchase cryptocurrency, it’s typically stored in a custodial wallet attached to an exchange or broker.

We’re pretty familiar with this arrangement with our stock portfolios and 401(k)s. A custodian, or large financial company, manages and takes care of our stocks, mutual funds or bonds.

But cryptocurrency was founded on the principle of decentralization: a form of digital currency that doesn’t rely on a bank or central financial institution.

For full ownership over your holdings, you must transfer your crypto off an exchange to a separate hardware wallet. These devices look like USB drives or small external hard drives.

Hardware wallets aren’t connected to the internet, so they aren’t susceptible to hacks and data breaches.

“It’s safer to custody crypto yourself,” Cole said. “And it’s much easier to set up a hardware wallet than it used to be.”

Ledger is a popular maker of hardware wallets. Its Nano S Plus model goes for $80 and can support up to 5,500 different crypto assets.

It’s OK to keep some money on an exchange, but experts generally recommend transferring 80% of your long-term funds to cold storage.

Hardware wallets remove the middle man — an exchange or broker — which puts all the responsibility of keeping your private key and assets safe on your shoulders.

If you lose the hardware wallet, or the backup recovery phrase, your coins are gone forever.

The Bottom Line on Holding or Selling Crypto

Whether crypto is forever doomed or will eventually rebound is unclear. Optimistic investors might see crypto as a bargain buy right now while owners who watched the price of their assets plummet may be wondering if it’s time to cash out.

Others, who only made a small initial investment, may decide to hold and take a “wait and see approach” during a moment of tremendous market uncertainty.

Creating an investment objective helps make the decision to buy, sell or hold easier.

Write your investment objective down somewhere so you can refer back to it later.

And perhaps, most importantly, don’t forget the golden rule of investing: Never put in more money than you can afford to lose.

Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder.




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